Finding safe havens among oil market worries

THE oil price is all that matters to markets right now, making many assets difficult to value. So much is unknown about the state of North African and Middle Eastern geopolitics. How long will the violence last? What follows the violence? What type of leadership will be installed? How long will it take for that leadership to come to the fore? Where will the violence spread to next? These are just the “known unknowns”.

It’s true that even regimes that have been unfriendly to the West have in the past supplied energy willingly, but markets don’t like uncertainty. So if pricing oil and working out the implications of a potentially higher price are tricky, where are the safe havens?

Currency market reaction has been muted. Much of the troubled region itself operates under pegged currency regimes. The Swiss franc has hit an all-time high against the US dollar, proving it still has safe-haven appeal, but the dollar has failed to find much direction in the crisis.

But as David Bloom of HSBC has warned, this could be the calm before the storm in FX markets. He also warns against seeking refuge in the currencies that benefit from higher oil prices such as the Canadian dollar and Norwegian Krone. These typically get a boost when oil prices are higher due to increased demand, but this latest spike was caused by a supply shock, not a demand led boom.

The traditional safe haven is obviously the bond markets but here investors seem uncertain. Oil prices rose 10 per cent last week but bond yields did not drop by a similar magnitude. When risk trades are out of favour and investors are nervous they typically like to own more fixed income as opposed to equities.

But the safe haven status of bonds has come under scrutiny in the past year, as investors have worried if governments will be able to honour their debts. Add to this the concern that an oil price shock could be inflationary and there’s more than one reason to question a flight to bonds.

On a positive note, James Shugg of Westpac Bank told me he does not think we need to rush to downgrade global growth if oil prices stay at about these levels (NYMEX light sweet for April was $97.88 a barrel at time of writing). But if prices look like matching the loftiest forecasts out there (Nomura fears $220) then all bets are off and we will all need safer havens.